The Supreme Court's decision in the so-called goodwill case will benefit thrifts in the short run and the government in the long term.
The ruling in U.S. v. Winstar frees thrifts with goodwill claims to pursue damages before the U.S. Court of Federal Claims and gives a boost to legislative efforts to recapitalize the thrift fund. The decision also will help the government next time it confronts a banking crisis.
The case arose when a desperate Federal Savings and Loan Insurance Corp. enticed healthy thrifts to take over ailing ones. In exchange, it said, thrifts could count toward capital for 40 years the difference between the failed institutions' assets and liabilities.
But Congress eliminated this favorable treatment in the 1989 thrift bailout law, leading scores of institutions to fail. Nearly 100 thrifts that lost regulatory goodwill sued the government for breach of contract, seeking more than $10 billion in damages.
The court sided with the thrifts, saying the government must abide by the contracts it signs or pay damages.
Just how many institutions will take advantage of the ruling remains uncertain. The Federal Deposit Insurance Corp. has said that 124 goodwill suits are pending. But several of those suits involve the same institution. Most lawyers put the net count at 100.
The claims court is expected to hold preliminary hearings this month in many of these cases. Jerry Stouck, who represents Glendale Federal Bank, said he doesn't expect thrifts to receive damage awards for at least a year.
But that timetable could be reduced substantially if the Justice Department tries to settle some of these cases. Justice Department officials declined to comment, but banking lawyers said they have seen few signs that the government is ready to throw in the towel.
Banking lawyers said these thrifts should have an easy time before the claims court. One lawyer familiar with the ruling said Justice David Souter crafted the opinion to specifically help other institutions win quick victories before the U.S. Court of Federal Claims.
Justice Souter wrote in Winstar that the government intended in the contract to insulate these thrifts from changes to the accounting rules. That intent establishes the government's liability. But he didn't point to particular wording in Winstar's contract to support his conclusion. This means the other institutions don't have to worry about whether their contracts are similar to Winstar's in order to win, the lawyer said.
The decision's ramifications also are spreading to Capitol Hill. James J. Butera, a partner at the Washington lobbying firm of Butera & Andrews, said the ruling could prompt Congress to act on the thrift-fund bailout legislation.
"The feeling is that Congress screwed the S&L industry in that aspect of the 1989 legislation and we shouldn't screw them again just because certain elements of the banking industry are against" the fund fix, Mr. Butera said.
Paul A. Schosberg, president of America's Community Bankers, said the decision is a reminder to Congress that its political choices on banking legislation have economic costs. Lawmakers should ponder that as they consider measures to bail out the thrift insurance fund, he said.
The government also comes out ahead, even though it is stuck with $10 billion in liability. Banking lawyers readily concede that this multibillion-dollar bill will bite. But they say the ruling could actually save the government billions of dollars by making it easier for regulators to react to future banking crises.
"The next time the government wants to enlist the help of the private sector in solving a major crisis, it will be able to do so," said Jerry Stouck, a partner at the Washington law firm of Spriggs & Hollingsworth. "If the decision had gone the other way, the government would not have been able to do that. That would have been a certainty."
"Nobody in their right mind would have ever dealt with the government again if they had won on those terms," agreed John F. Cooney, a partner at the Venable law firm in Washington.